Dave, I know you are sold on the Steve Keen model that says things can work out based on a certain set of behaviors as programmed into a stock-to-flow model he has. Here is what one Chris Martenson wrote back in June;
I agree with the highly simplified and utterly unrealistic set up which has all flows of money coming back into the bank and then flowing back out into the world, perfectly balanced with all stocks, and no accumulations of said stocks at any particular points.
Under those conditions of idealized and perfect stocks and flows it's theoretically possible to make it all balance out.
However, out there in the real world, where there's $57 trillion in debt, it's impossible to have all $2 trillion in debt remittances flow into the bank and back out as wages in a manner that prevents exponential growth in the money system.
By way of evidence I have charts of both debt and money spanning many decades with near perfect exponential growth. R^2 of 0.99, baby!
So what does it matter if it's theoretically possible under heavily constrained conditions in a stripped down spreadsheet to make stocks and flows balance for a couple of turns of the crank? Stocks and flows are never ideal or perfect and, because of this, you get the exponential behavior we see in the real world.
In this particular argument, I agree with Chris. Left to it's own devices, our monetary system is dynamically unstable in that total debt tends to run away from total money. This is quite obviously a feature of the system given that the money creation mechanism creates the principle, but not the interest.
The new "argument:" you give above, that monthly payments are somehow the key to understanding your point… makes no intuitive sense to me. As an engineer, looking at the money system as a whole, the relative "lumpiness" of the payment stream would seem to make little difference. Sure, from a personal affordability standpoint, and given human nature… it is important. But, from a system stability vs. instability point… and I am arguing that the debt based money system is prone to instability, whether payments are made weekly, monthly, or yearly, would make little difference when viewed in aggregate. Total payments would be about the same on a yearly basis whether paid monthly or yearly, and over many loans the dates of these (much larger, much lumpier) yearly payments would amount to exactly the same hill of beans.
As I have shown in a post above, total debt in Western money systems tends to outpace total money by about 2X. I suggest this is because total debt = total principle + total interest, and the interest portion of this equation is never explicitly created.
A specific case as food for thought;
As one digests this particular dynamic of our money system, it occurs to me that the system could get into trouble especially during the latter half of a housing boom. Since housing debt. is the bulk of our total consumer debt, it really wags the dog when it comes to the dynamics we are talking about. As of this Nov. '13 report, mortgages accounted for 70% of our total indebtedness;
http://www.newyorkfed.org/householdcredit/2013-Q3/HHDC_2013Q3.pdf
What do we know about mortgage loans? Well, for one, they are big, creating a LOT of money all at once. Two; They are long lived, most of the time 30 years in length. Thirdly, they are highly front loaded in terms of interest payments… the payoff of principle being back loaded.
Because of these three dynamics, we can imagine the following; Since mortgages are so long-lived - the interest compounds for so long, the amount of interest is very high relative to the initial loan amount.
For example, a $100,000 mortgage at 5.75 percent paid for 30 years will actually cost the borrower $210,000 to repay.
While each monthly payment is the same (approximately $583 a month), the payment is not divided into level amounts of interest and principal. At the beginning, the payments are mostly interest. At the end, the payments are almost entirely principal and no interest.
http://www.bizjournals.com/cincinnati/stories/2004/04/26/focus5.html?page=all
So, let's say you have a housing boom... lots of money is being created, and most of it is being paid back as interest, meaning that most of it is not being destroyed. Everybody is happy.. lots of liquidity in the early stages.
But what happens at the tail end of this boom, say 15 years in? Well… much of the interest has been paid, and the payments are tipping over to favor principle. Money is being destroyed. The system's liquidity is being reduced (all other factors equal). I don't see how anyone could argue that this is not so.
Some may view all of this as some kind of academic argument. I don't… .I think understanding these points are key to understanding what motivates our central bankers. Around the 14:00 mark in the video below, Alasdair is talking about money creation, and the need for ongoing and increasing money creation. He says,
either they (the banks) do it, or the FED does... the reason the FED does QE is they are worried the banks aren't doing enough....
The FED wants the total amount of fiat money to continue to expand - otherwise they see a potential crisis.
When the banks are pushing on a string... QE is the only way to keep shoveling money in. Now ask yourself this; Do you think we are done with QE now that the taper is completing? Do the stock vs. flow (model) guys like Dave and Steve Keen think our banking system will be fine through such a liquidity squeeze? Do their models account for the distorting effects of all the derivatives, interest rate and otherwise? Will deflation be allowed? Or do we in fact have a system that is almost always net starved for liquidity because of the fact that total debt runs away from total money?